Debates have occurred for a long time over the topic of discount brokers vs full-service brokers. In this week’s Mullooly Asset Management podcast Tom and Brendan take on this heavily disputed subject. They talk about what you can expect when you choose to invest with either a discount broker or full-service broker. Here at Mullooly Asset Management we work with discount brokers to keep the focus on making money for our clients, not racking up fees and commissions. Before Tom founded Mullooly Asset Management he worked on the full-service side for 16 years. If anybody can shed some light on the discount brokers vs full-service brokers debate, it’s Tom.
So what can you expect when you invest through a full-service broker? The first thing you can count on is plenty of fees. The commission structure at big firms like Merril Lynch and Morgan Stanley is really high. Expect a commission of 1-2% when you buy or sell any investment through a full-service broker. Most full-service brokers charge additional fees for things like getting a checkbook or having an IRA as well, which is a bit ridiculous.
Many full-service brokerage firms have a minimum requirement to begin investing with them. This tends to alienate investors who are just getting started. Many of these big firms claim that the big bucks investors pay them goes towards their “superior” research processes. However, with the growth of the Internet the vast majority of this information is easily accessible online. Occasionally full-service brokerage firms will offer Initial Public Offerings (IPO’s), but IPO’s aren’t as big as they once were.
A final thing to keep in mind about full-service brokers is that they offer a limited selection of mutual funds. Brokers at full-service firms tend to offer in-house funds or funds that their firm has selling agreements with. If you want to buy a mutual fund that the firm doesn’t have an agreement with, you cannot do it through them.
When you invest through a discount brokerage firm you can expect heavily discounted commissions. Commissions on trades can be as low as $10. Bear in mind that discount brokerage firms expect either you or your investment advisor to be making the trades online. If somebody has to call Charles Schwab or TD Ameritrade for example, commissions become more expensive. Even if you call into the discount broker, the cost will still only be around $40.
Discount brokers offer service oriented items for free. Service oriented items include having an IRA and getting a checkbook for your account. There are no minimums required to invest through a discount broker. Investors can find plenty of valuable information and research through discount firms as well. They provide you with the tools to focus on what is important to you and your investments. Discount brokers also do not place any limitations on the investments you want to buy or sell.
As you can see, there are a considerable amount of differences that exist in this debate. Hopefully this post and podcast helped clear up the discount brokers vs full-service brokers discussion for you.